Interesting post last week from Herb Greenberg at Seeking Alpha on whether Wall Street should hand back its bonuses to subprime victims.

"During my Power Lunch stint on CNBC yesterday, one of the guests was Inez Killingsworth, a board member of the NTIC, who said the the research of her groups shows that Wall Street has "blood on their hands" in relation to the sub-prime slime," Greenberg writes. "I agreed with her (securitizations, anyone?), and then asked her something along the lines whether the fact that lower Wall Street bonuses this year should be punishment enough. (You try to challenge all guests.) Killingsworth said her group believes Wall Street should set up some kind of fund for owner-occupants who were can't afford to stay in their houses because of predatory or simply sloppy lending practices."

The proposal has a certain appeal but it's not going to solve the problem, particularly when those investment houses and hedge funds have already lost billions.

But it does raise an interesting question: did the bonuses contribute to the subprime meltdown?

That certainly seems to be the message from James Surowiecki in his piece Performance Pay Perplexes published a few weeks ago in the New Yorker.

Basically his argument boils down to this: the financial wizards made bad decisions because that's what they were paid to do. Fund managers get bonuses at the end of each year, and they keep those performance fees even if the fund eventually goes south. Let's say for example that a billion-dollar hedge fund rises twenty per cent in its first year and falls twenty per cent in its second. The poor investors will have lost money, while the fund's manager still earns tens of millions in performance fees. He doesn't have to give it back which means there is no down side. Hedge funds have a rule that when the fund loses money, it yields no performance bonus until investors get back to even. To get around that, the hedge-fund manager simply shuts down after a bad year and walks away with the fees. It also means that the hedge fund managers have a much greater risk to take bigger risks than ordinary investors.

"One lesson of the current market chaos, then, is that it's hard to get incentives right," Surowiecki writes. "Investors, after all, want fund managers and corporate executives to take reasonable risks-that's the only way to make money-and many of them do just that. But, in trying to reward reasonable risks, we've encouraged unreasonable ones as well. And when you make it rational for people to bet the house, you may end up without a roof over your head.